A large part of economics has to do with numbers. In fact, many economic issues can be solved if you have the right formula and enough data. Fortunately, there is no shortage of data these days. Dozens of economic reports and indicators are published every week by government agencies and private organizations. Most of them are accessible to the general public and can be used for research purposes.
Of course, not all of this data is relevant for everyone. Depending on the relevant topic or issue, there are different indicators that should be taken into account. Nevertheless, there are three main types of economic indicators, depending on their timing: leading indicators, lagging indicators, and coincident indicators. Let’s look at them in more detail.
Leading indicators signal future changes. That means, they usually change before the economy itself changes. This makes them extremely useful for short term predictions of economic developments. An example of a leading indicator is the stock market. Stock market returns usually start to decline, before the economy as a whole falls into a recession and vice versa. Other examples of leading indicators include: retail sales, the housing market, and manufacturing activity. It is important to note however, that leading indicators (not unlike all other indicators) may not always be accurate and should always be used with caution.
Lagging indicators usually change after the economy as a whole changes. For that reason, they cannot directly be used to predict economic changes (since those have happened already). They are more useful to confirm specific patterns (e.g. economic cycles) and make further predictions from there. Arguably the most popular example of a lagging indicator is unemployment. Unemployment usually starts to increase a few quarters after the economy has started to recover from a recession. Other lagging indicators include: GDP, consumer price index (CPI), and business inventories.
Coincident indicators occur at about the same time as the changes they signal. Therefore, they can provide valuable information about the current state of the economy. An example of a coincident indicator is personal income. If the economy is strong and business is going well, personal income rates will increase at about the same time. Other examples of coincident indicators include: interest rates and personal outlays.
Please note: The boundaries between the classifications described above are not always clear-cut. Many of the indicators can be used to analyze and predict several economic changes within different time frames. Accordingly, they are sometimes categorized in different groups. So, don’t be surprised if you see a different list that classifies for example GDP as a coincident indicator or interest rates as a lagging indicator.
In a Nutshell
Indicators are crucial to calculate and predict current and future economic performance. There are three types of economic indicators, depending on their timing: leading, lagging, and coincident indicators. Leading indicators signal changes before the economy as a whole changes. Lagging indicators change after the economy changes. And last but not least, coincident indicators change at about the same time as the changes they signal.